“The majority of outstanding debt comes from the UAE at 91 per cent and 50 per cent for 2008 and 2009 respectively while Kuwait and Saudi Arabia make up the rest of the debt for 2009 (22 per cent and 10 per cent, respectively),” Merrill Lynch economists said.
According to their report, state-owned companies account for 92 per cent of the total debt to be repaid this year and 61 per cent for next year.
“Despite their deep pockets of savings, the rapid change in the global financial scenario puts GCC countries in a tight corner. The level of private sector indebtedness has increased sharply since 2007, especially in the UAE. Given the deepening credit crunch, redemptions in the pipeline, and the surged investment activity, funding has become an issue for GCC countries,” they said.
They noted that the drop in oil prices was not only deteriorating investor sentiment but also limiting money and credit growth.
“As oil prices and excess liquidity created by oil windfall reverse, the region’s hot real estate market will come under pressure as asset bubbles continue to deflate elsewhere. Though governments inject liquidity into the system to ease short-term funding constraints and weather the strong headwinds, lower GDP growth in both oil and non-oil sectors seems inevitable,” they said.
Although GCC countries are better positioned for the global downturn this time around, the net impact will still be lower growth and smaller surpluses, they pointed out.
“The UAE, as the most open and most leveraged economy in the GCC, will be more adversely affected. As the tourism and trading hub of the region, global downturn should negatively impact the UAE the most. As such, we cut our 2008 and 2009 GDP growth forecasts to 6.8 per cent (from 7.2 per cent) and to 4.5 per cent (from 6.8 per cent), respectively.”
They expect GCC’s GDP growth to slow to 4.5 per cent in 2009 from 6.2 per cent this year. “Assuming oil prices at $ 90/bbl in line with our house view, the region should still enjoy a current account surplus of 20 per cent of GDP and a budget surplus of 15 per cent of GDP.”
The lowest breakeven oil price that would bring 2008- 2009 budgets into balance in Saudi Arabia is $ 30/bbl, followed by the UAE at $ 40/bbl and Qatar at $ 55/bbl). This means that Saudi Arabia can maintain the current level of budget spending even if the oil price were to fall to $ 30/bbl. The highest breakeven is in Kuwait ($ 75/bbl), but that is mainly due to the one-off budget transfer of $ 20 billion to capitalise the social security system in FY08/09. The average breakeven for GCC is $ 50/bbl.
